Shares of Ireland-based ICON plc (ICLR), a contract research organization, which were trading in the range of $11 - $15 in 1998, have had a nice run since then and hit an all-time high of $75.37 on May 21. The stock has gained an impressive 67% over the last twelve months, in sharp contrast to S&P 500 index, which lost nearly 10% during the same time frame.
Though the stock is now down over 5% from its all-time high, there appears to be a lot going for it.
Contract Research Organizations or CROs are outsourcing companies hired by drug companies and medical device companies to support their R&D (Research & Development) programs. Due to lack of internal expertise, infrastructure and soaring drug development costs, drug companies outsource the R&D functions to CROs. Outsourcing clinical research to CROs helps to cut costs as well as time through faster drug or device development.
The global CRO market was valued at $14 billion in 2006. According to the Tufts Center for the Study of Drug Development, the CRO market is expected to grow at an annual rate of 16% for the next five years. Goldman Sachs estimates that the total value of Contract Research services will reach $22.9 billion in 2009. Going by the numbers, the future appears rosy for the CRO industry, despite the truth that its growth has slowed, compared to its 20% growth seen in the mid-1990s.
ICON currently trades around $71, which is 29 times, the expected earnings for 2008 and 23.5 times next year's anticipated earnings. Can the stock keep its momentum going?
Profile
ICON plc was founded in 1990 in Dublin by Dr. John Climax and Dr. Ronan Lambe. In 1992, the company established its first office in the U.S. in Philadelphia. The company provides clinical research and development services on a global basis to the pharmaceutical, biotechnology and medical device industries. ICON mainly supports the conduct of clinical trials by providing such services as Phase I - IV clinical trials management, study design, laboratory services and drug development support. ICON operates under two segments - Central Laboratory and Clinical Research.
Growth Drivers
1. Earnings
The company continues to deliver double-digit earnings and revenue growth year-over-year. Since 2002, ICON's revenues have increased at a compounded annual growth rate or CAGR of over 32%, while per share earnings have grown at a CAGR of 26%.
For fiscal 2007, the company's earnings were $55.9 million, up 46% over 2006. On a per share basis, earnings for fiscal 2007 were $1.88, compared with $1.33 in 2006. Net revenues for 2007 rose to $630.7 million from $455.9 million in 2006. ICON attributed the increase in earnings to its 38% revenue growth, which was helped by new business contracts from existing as well as new clients, increased use of outsourcing by the pharmaceutical, biotechnology and medical device industries and an underlying increase in research and development spending.
For the first quarter ended March 31, ICON earned $16.89 million or $0.56 per share, compared with $12.26 million or $0.42 per share in the year-ago quarter. Net revenues for the quarter rose to $201.3 million from $136.1 million in the year-earlier period.
2. Expanding footprint
Other than Ireland, ICON operates in the United States, United Kingdom, France, Germany, Spain, Italy, The Netherlands, Denmark, Sweden, Finland, Russia, Latvia, Lithuania, Ukraine, Poland, Romania, Czech Republic, Hungary, Israel, Australia, New Zealand, Japan, South Korea, China, Taiwan, Hong Kong, Thailand, Singapore, India, South Africa, Canada, Mexico, Brazil, Peru, Argentina and Chile. ICON has undertaken projects in more than 60 countries. With the globalization of clinical trials, geographic expansion in new markets has become a necessity for CROs.
First quarter revenue distribution
(a) By Demography
In the first quarter of 2008, the United States accounted for 45.7% of the company's net revenues, followed by Europe's 46.3%. The rest of the world accounted for 8% of the net revenues. In the year-ago period, the U.S contributed 53.6% net revenues, while Europe accounted for 40.2% and the rest of the world accounted for 6.11%. Increasing contribution from the European Union and the rest of the world, which have a huge potential for clinical trials bodes well for ICON.
(b) By Segments
The Central Laboratory segment accounted for 8.1% of ICON's first quarter 2008 net revenue while almost 92% came from the Clinical Research segment. In the first quarter of fiscal 2007, the Central Laboratory segment and the Clinical Research segment contributed 9.6% and 90.4% of the company's net revenues respectively.
3. New business contracts
ICON continues to keep adding a share of the outsourcing pie as can be seen from the increasing number of business awards it has secured in each quarter. Net new business wins in the first quarter ended March 31, totaled $369 million, up from $344 million in the preceding quarter.
Net new business wins in the last 5 quarters.
Period Mar -08 Dec -07 Sep -07 June -07 Mar -07
Amount $369 Mln $344 Mln $230 Mln $230 Mln $223 Mln
4. Strong Backlog
As of the first quarter of fiscal 2008, the company has a record backlog of $1.48 billion, up from $1.3 billion in the preceding quarter and $963 million in the first quarter of fiscal 2007. Backlog is a measure of potential financial performance as it is a strong base for forecasting the revenue.
5. Improving Margins
ICON's operating margin over the years has continued to increase. The company's operating margin in fiscal 2007 increased to 10.97% from 10.5% in fiscal 2006.
6. Increased Research & Development spending
There has been an increase in Research & Development or R&D spending by the drug industry. In 2007, America's biopharmaceutical research companies invested $58.8 billion in R&D, compared with $56.1 billion in 2006, according to the Pharmaceutical Research and Manufacturers of America. The increased R&D spending has increased the number of preclinical compounds in development and has strengthened Phase II/III pipelines, which augurs well for Contract Research Organizations like ICON.
According to *Pharmaprojects, the number of preclinical developments as of November 2007, increased 23% from December 2006, the number of Phase I compounds in development rose 22% and the number of Phase II/III compounds in development improved 14% during the same time frame. During 2007, the number of new business awards of value greater than $5 million secured by ICON totaled 46, compared to 32 in 2006 and 14 in 2005.
(* Pharmaprojects is a source of worldwide business intelligence on new drugs under development).
7. Opportunities in emerging markets
Russia, Latin America, China and India have emerged as the hotbeds for clinical research and ICON is well positioned to benefit from growing opportunities in these countries. About 50 clinical studies are being conducted by ICON in Russia, 43 in Argentina, 30 in Brazil, and more than 40 in Mexico, Chile and Peru. About 20 clinical studies conducted by ICON are underway in India and 16 in China. According to Pharmaceutical Manufacturing and Packing Sources, India's CRO market, which was valued at $100 million in 2007, is estimated to grow to $1.1 billion - $1.5 billion by 2010.
8. Strong Balance sheet
(a) Current Ratio
In the recent quarter ended March 31, the company's current ratio is 1.62:1, indicating that the company has $1.62 of current assets for every $1.00 of current liabilities. A current ratio of 1.5:1 and greater is considered to be a strong current ratio and is ideal for most businesses. Current ratio is a measure of a firm's liquidity and it indicates if a company has enough current assets to meet its short-term financial obligations.
(b) Return on Equity
ICON's return on equity or ROE is a respectable 16.36%, compared to Industry (Research Services industry) average of 4.5% and Sector (Service sector) average of 14.60%. An ROE of 16.36% indicates that the company generates $16.36 of earnings for every $100 that has been invested by shareholders over time.
9. Upward revision of earnings estimates
Over the past thirty days, second quarter earnings estimates have moved up by 1.7% to $0.59 per share. In the last 90 days, analysts have raised 2008 earnings estimates by 6 cents to $2.43 per share and next year's earnings estimates by 11 cents to $3.04 per share.
10. Positive earnings surprises
ICON has topped analysts' earnings estimates for the past ten quarters in a row by an average surprise of 8.2%.
Risks
1. Expensive Valuation
ICON's P/E ratio based on the past twelve-month earnings is 35.25, compared to Sector average of 22.41 and much higher than its peers Covance Inc. (CVD), and Parexel International Corp. (PRXL). Such an expensive valuation implies that future growth is already built into the stock.
2. Reliance on a limited number of clients
As the company derives a significant portion of its net revenue from relatively limited number of clients, any crisis affecting these clients will have an adverse impact on ICON's business. During fiscal 2007, ICON derived 30% of its net revenue from its top five clients.
3. Cancellation of contracts
The cancellation of contracts by clients will adversely impact ICON's revenues as it will be difficult to replace those projects. The clients cancel contracts if the tested product fails to satisfy safety or efficacy requirements or produces undesired clinical results, or if the particular study testing the product is no longer necessary. Poor project performance, insufficient patient enrollment or investigator recruitment can also lead to cancellation of contracts.
4. Competition
The market for Contract Research Organizations is highly competitive. ICON competes with much larger rivals like Covance Inc. (CVD), i3 Research, a subsidiary of United Health Group Inc. (UNH), Kendle International Inc. (KNDL), MDS Inc. (MDZ), Omnicare Inc. (OCR), Parexel International Corp. (PRXL), Pharmaceutical Product Development Inc. (PPDI), PharmaNet Development Group Inc. (PDGI), PRA International Inc. (PRAI) and privately-held Quintiles Transnational Corp.
Stock Performance
After a sharp run-up for about two years until 2007, ICON's upward momentum has been slowing. Thereafter, the stock began moving sideways and was trading in the range of $61 - $71 until April 2008. Although the stock legged up, the break-out in late April that was accompanied by heavy volumes on strong first quarter earnings report resulted in another trading range of $70.50 - $75.50 through most of May.
It is noteworthy that ICON has been trading above its 200-day moving average since mid-August 2005, and therefore, the stock is likely to have strong support around this key level, which is at $61.30. On Tuesday, the stock bounced off its 50-day moving average, which is currently at $68.70, closing at $71.48. On the upside, the stock faces resistance around its May high of $75.37, which also happens to be its record closing high.
Conclusion
ICON's stock continues to be driven by the company's consistent earnings, new business contracts, a strong balance sheet and a conducive market environment, helped by increased R&D spending of drug companies. However, the company's reliance on a limited number of clients for its revenue, intense competition and expensive valuation of the stock are seen as possible investment risks.
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June 05, 2026 16:18 ET A busy week for economic news flow saw a slew of reports being released that reflected the trends in the U.S. labor market. In Europe, economic growth and inflation data gained attention as the European Central Bank and Bank of England head for policy session later in the month. In Asia, the monetary policy session of the Indian central bank was in focus as the country, a major oil importer, reels under the pressures of a weaker rupee and rising inflation.